Long Term Care University – Question of the Month – 01/15/13
By Aaron Skloff, AIF, CFA, MBA
Q: We read the November 15, 2012 and December 15, 2012 Long Term Care University articles that compare Combination Life/Long Term Care insurance policies to Traditional Long Term Care (LTC) insurance policies and decided to purchase a Combination policy. When comparing two Combination policies we realized one of the policies explicitly references to “long term care” while the other explicitly references to “chronic illness”. Is there a difference in these policies?
The Problem – Not All Combination Polices are the Same
Combination policies can pay for long term care services by accelerating the death benefit of a policy, according to Internal Revenue Code 101(g). But, there are two distinct types of Combination policies. One type provides the same flexibility of a Traditional Long Term Care Insurance Policy. The other type is more limited and can result in your claim being denied by the insurance company. Below, we compare and contrast the policies.
7702B Combination Policies. Insurance companies can explicitly state that these policies will pay for “long term care”. The requirements to qualify for long term care benefits with this type of policy are the same as those for a Traditional LTC Insurance policy. Claims approvals are based on a licensed health care professional certifying that you are unable to perform two or more activities of daily living (ADLs: bathing, continence, dressing, eating, toileting and transferring) or have severe cognitive impairment.
One key criterion to qualify for benefits is that the need is expected to last 90 days or more. Like Traditional policies, 7702B Combination policies do not require that your care is expected to be permanent. For example, this type of policy could pay for your care if your Dr. says your care is expected to last 10 months. Like a Traditional LTC policy, a 7702B policy is designed to pay claims even if you recover and go back on claim in the future.
101(g) Only Combination Policies. Model Regulation 620 prohibits insurance companies from marketing these policies as “long term care” policies. It further defines one of the permissible qualifying events as a condition “that usually requires continuous confinement in an eligible institution as defined in the contract if the insured is expected to remain there for the rest of his or her life.” Thus, 101(g) Only Combination policies require that your care is expected to be permanent. Meeting the requirements to qualify for long term care benefits with this type of policy are much more difficult than 7702B policies. For example, this type of policy would not pay for your care if your Dr. says your care is expected to last 10 months.
The Solution – Purchase a 7702B Policy Instead of a 101(g) Only Policy for Coverage of Temporary Claims
Before purchasing a Combination policy, verify what type of policy it is. Ideally, purchase a 7702B policy over a 101(g) Only policy. A temporary (not expected to be permanent) claim that lasts 10-20 months can easily cost $75,000 to $150,000. While a 7702B policy could pay 100% of your costs, a 101(g) Only policy would pay none of your costs.
Action Step – Verify in Writing Whether Your Policy is a 7702B or 101(g) Only Combination Policy
Look for the explicit reference to “long term care”, or lack there of in the insurance companies’ brochures and marketing materials. Go one step further and have the insurance spell out exactly what type of policy they are offering.
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA) charter holder, Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a NJ based Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.